ETF Investing Guide: Part 2

In the first part of this guide, we explored ETFs’ core function of tracking a basket of assets, weighed the advantages and potential risks associated with ETF trading, and finally, introduced you to the diverse range of ETFs available. Now, let’s focus on how you can capitalise on this instrument.

How to Select the Right ETF

When selecting ETFs, consider opting for broad indices to maximise diversification benefits.

A broader index encompasses a larger number of underlying assets, spreading your investment across a wider range of companies and sectors. This diversification helps mitigate the impact of individual stock or sector performance on your overall portfolio. It might also be a good idea to diversify across different countries and regions to reduce exposure to specific market risks.

Beyond index selection, here are some other important factors to consider when selecting an ETF:

Type of Index or Asset Replication: There are two main methods for replicating an index: physical replication (owning the underlying assets) and synthetic replication (using derivatives).
Size of the ETF: Bigger ETFs generally have more active trading and greater liquidity, which simplifies the process of buying and selling shares.
Dividend Distribution Options: Certain ETFs provide dividends to shareholders, while others choose to reinvest them within the ETF.
Historical Performance: Examine the ETF's past performance to assess its level of volatility and risk. While past performance does not guarantee future outcomes, it can offer valuable insights.
Tracking Error and Tracking Difference: These metrics assess the level of correlation between the ETF and its underlying index. It is generally preferable to have lower tracking errors and differences.
Trading Volume and Liquidity: Take into account the ETF's daily trading volume and liquidity to ensure smooth entry and exit of your positions whenever you’ve decided to open or close your trades.
Management Fees and Other Charges: It's important to compare expense ratios and other charges when considering different options, as ETFs generally have lower fees compared to actively managed funds. Still, there can be significant differences between different ETFs.
ETF Issuer: Thoroughly research the reputation and track record of the ETF issuer to ensure that they are credible and experienced.
Your Tax Situation: Take into account the impact of the ETF's structure (such as accumulating versus distributing) on your tax situation.

3 Examples of ETF Trading Strategies

Having grasped the fundamentals of ETF selection and portfolio construction, you might be curious about how to leverage these versatile tools in your investment strategies. Let’s take a look at some popular ETF trading strategies:

Buy-and-Hold: Stay focused on long-term goals and avoid being swayed by temporary market ups and downs. Stay steady through the highs and lows, having faith in the potential for long-term growth in the assets you hold. Keep your focus on broad market ETFs or ones that align with your long-term objectives, such as retirement or growth.

Dollar-Cost Averaging: This type of ETF trading technique can be a buy-and-hold strategy with a twist. Instead of investing a lump sum upfront, you invest a fixed amount of money at regular intervals, regardless of the ETF's price. This helps you average out the cost per share over time, potentially reducing the impact of market volatility on your overall investment. It's a great way to build a diversified portfolio gradually and instil discipline in your investment approach.

Hedging: Hedging is a technique used to handle risk. It's similar to using a protective umbrella during a downpour – you can't completely stop the rain, but you can protect yourself from its harshest impacts. If an investor is worried about a possible market downturn, they may consider purchasing an inverse ETF. These ETFs are specifically designed to provide the inverse return of a particular market index. If the market experiences a decline, the inverse ETF can provide a potential hedge by increasing in value, thereby helping to mitigate some of the losses in the investor's primary portfolio.

Trade CFDs on ETFs with ActivTrades

Although ETFs provide a solid investment opportunity, it's worth considering alternative options. At ActivTrades, we provide a diverse selection of ETFs for trading through Contracts for Difference (CFDs).

Imagine a CFD as a contractual agreement between you and ActivTrades, where you both agree to exchange the difference in the price of an asset (specifically, an ETF) from the moment you enter the contract until the moment you exit.

When it comes to ETFs, CFDs offer a different approach. Instead of owning the ETF directly, CFDs allow you to speculate on its price movements, regardless of whether they rise or fall. Some investors may find this appealing due to the increased flexibility it offers in their trading strategies.

Furthermore, CFDs involve leveraged and margin trading, allowing you to trade with a larger sum of money than what is available in your trading account. Nevertheless, leveraging your investments can significantly increase both your gains and losses.

Here are some popular ETFs you can trade with ActivTrades:

Countries

Sectors

Cryptocurrencies

Commodities

Bonds

Trading Strategies

Is ETF Trading For You?

So, you've ventured into the realm of ETFs, explored various types, and gained knowledge about how to select and invest in them. Now comes the important question: Do ETFs align with your investment journey? Well, the answer will vary based on several factors including your investment horizon, risk tolerance, knowledge, strategy, and goals.

10 ETF Trading Tips

Know what ETFs are, how they work, and what can influence their values.
Consider your trading strategy, goals and risk tolerance before getting into ETF trading.
Think beyond borders and widen your horizon.
Don't just pick a random ETF, take time to select the right one for you.
If you follow an active trading strategy, avoid the market open and close times.
Always consider market volatility.
Know about the different kinds of orders you can use with your broker.
Stay up-to-date on market trends, but don't try to chase the market.
Review and rebalance your holdings regularly.
Seek professional advice if you need to.

The information provided does not constitute investment research. The material has not been prepared in accordance with the legal requirements designed to promote the independence of investment research and as such is to be considered to be a marketing communication.

All information has been prepared by ActivTrades (“AT”). The information does not contain a record of AT’s prices, or an offer of or solicitation for a transaction in any financial instrument. No representation or warranty is given as to the accuracy or completeness of this information.

Any material provided does not have regard to the specific investment objective and financial situation of any person who may receive it. Past performance is not a reliable indicator of future performance. AT provides an execution-only service. Consequently, any person acting on the information provided does so at their own risk.